Over the years, shareholders in private bank Julius Baer have drawn plenty of comfort from its solid finances, wealthy clients and its share buyback plans.

While its bigger rivals UBS and Credit Suisse suffered upsets after the credit crisis, Baer’s results have been as predictable as the two hours, 43 minutes Swiss trains take to travel between Zurich and Geneva.

So shareholders can be forgiven for being rattled by the decision of chief executive Boris Collardi to use its strength to mount an audacious bid for Bank of America Merrill Lynch’s international wealth business serving non-US clients.

Rather than benefiting from buybacks, investors will be asked to stump up Sfr500m ($511m) through a rights issue to help pay for the Sfr860m deal. After taking account of all costs, outgoings could go as high as Sfr1.5bn.

Shareholders are due to pass their verdict on the deal on September 19. Approval is likely, but cannot be taken for granted following a 10% fall in Baer’s share price since the deal was announced.

The key problem is that Collardi is seeking cash upfront, but cannot tell shareholders about the final outcome of his deal until 2015.

This is because Baer does not want to rush Merrill clients into deciding to transfer from a US to a Swiss-owned bank. Those using a corporate structure could take years to approve such a move.

Merrill advisers also need to decide whether they want to stay with Baer and agree a new pay structure.

At present, they are being paid a US-style slice of client commissions as opposed to Baer’s preferred discretionary model, where bonus payments are driven by asset gains.

In the past, top advisers at Merrill have retained as much as 45% of the transactions they generate while Swiss bankers cannot expect bonuses much higher than 25%.

Because trading commissions are low, the two have been generating similar sums of late. But Merrill advisers will still want to think long and hard before agreeing to move to a new structure, which will not look so generous if markets improve.

Merrill’s international division has been losing money for years as a result of heavy staffing costs. As well as high pay, its army of support staff have grown to a hefty 2,200 following piecemeal foreign expansion.

As a result, its cost income ratio was 105% in 2011 before exceptional costs, or 114% after them. Net new money accounted for 1% of the total book.

Collardi will start off running the two pay systems alongside each other, before bringing them together. Support synergies will result by combining overseas offices. But all this amounts to a delicate balancing act.

Analyst Teresa Nielsen at rival asset manager Vontobel thinks Baer can aspire to get Merrill’s cost income ratio down to 81% by 2015. But she sees a risk that Merrill’s structure will inspire Baer’s advisers to ask for more pay.

A string of Merrill advisers will seek to leave and take their clients with them. Baer has conceded that it might only end up with accounts totalling Sfr57bn, against a target of Sfr72bn, although this will cut its acquisition price.

Baer says the Merrill deal will achieve an earnings gain of 15% by 2015. But the greater number of shares in issue will dilute Baer’s existing earnings. A group net gain of 6% would result.

A purchase price of 1.2% of assets looks low but rationalisation costs could push it to 2.1%. Nielsen points out Safra Group’s less complex purchase of rival private bank Sarasin was an effective 0.7%.

Mediobanca analyst Christopher Wheeler is relatively upbeat on the deal, pointing to Baer’s effective style. Clients will be reassured through their continued access to Merrill’s expertise, he says.

Wheeler thinks shareholders will support the deal but added: “Raising the necessary capital before the scale of the deal is known will be a challenge.”

Dirk Becker, an analyst at Kepler Capital Markets, agrees for the simple reason that investors will remain keen to invest in “safe” financial stocks for some time to come.

He said: “Julius Baer might have carried out a large dilutive and value destructive transaction, but it has not increased its exposure to the euro debt crisis.”

This is a comfort. But Baer will not recover its premium rating until Collardi can prove that the benefits from the deal he has cooked up will prove as substantial as his appetite.

Worlds apart

The $3bn gift US activist investor Carl Icahn has given his son Brett to develop an asset management business shows billionaires live in a different world to the rest of us.

Statistics produced by Boston Consulting Group confirm that the wealth gap between billionaires and millionaires is widening even faster than the one that exists between rich and poor.

Profits generated by manufacturers of luxury goods and private banks have been resilient throughout the credit crisis.

Julius Baer’s proposed purchase of Bank of America Merrill Lynch’s international business is just the latest of a string of deals from high and ultra-high net worth advisory firms and their financial backers that display confidence in prospects for the wealthy.

Royal Bank of Scotland may be troubled but Coutts, its wealth arm, has never been so proactive in terms of recruitment.

The key point is that investors are increasingly uncertain where to put their money in periods of market volatility.

This means that private bankers can expect to generate fatter fees by offering quality advice as opposed to pushing products. Better still, investment in technology has led to greater efficiency and cost savings.

The viability of the wealth advisory model is illustrated by the fact that several Swiss private banks have been in existence for more than 200 years. Coutts was founded in 1692. In contrast, the vast majority of asset managers are modern inventions nurtured by post-war bull markets.

Tougher regulation and tax measures appear to be tightening the screw on advisers. Julius Baer is one of 11 Swiss banks being probed by the US authorities over allegedly helping its clients avoid tax.

But uncertainties like these are precisely what forces clients to pay for as much advice as they can possibly get.